Last week, India’s Prime Minister Narendra Modi hit the headlines with his promise of bank accounts for every household in the country, a bid to offer help to the country’s poor. The initiative is part of a movement towards financial inclusion, which means making financial services accessible by people who do not have formal identification documents, fixed abodes or even known dates of birth. Financial inclusion can be a sticky wicket for large financial institutions, however, as this same group of people can be defined, albeit unfairly, as high-risk and the costs of compliance with anti-money laundering rules can render financially inclusive products uneconomical.
PM Modi’s Jan Dhan Yojana (Scheme for People’s Wealth) wouldrely on the biometric data obtained for the Aadhaar Unique Identification Number (UID) programme to remove some of the account opening requirements which have caused financial inclusion in the past.
The scheme is targeting 75m Indians who receive welfare payments and subsidies for grain, fuel and fertiliser, offering ‘account holders a debit card and accident insurance cover.’The aim is to reduce poverty by safeguarding salaries in banks and to stem corruption around cash hand-outs. With fewer people in the chain, there will be fewer hands on the rupees and reduced attempts at syphoning some of it off.
The large scale financial inclusion plan looks good from this perspective, although it is facing a few setbacks.
Another grand scheme designed to protect the integrity of the financial system is putting up one of the main obstacles to financial inclusion. Anti-money laundering (AML) rules globally recommend proof of identification backed by proof of address provides the ‘one plus one’ basic requirement for opening a bank account, applying for a loan, credit card and other financial products. Many people in India have neither. The financially excluded create a risk/reward scenario which is often viewed unfavourably by financial institutions. The amount of work required to ID them and monitor their accounts, which contain relatively small balances, makes developing inclusion focused products cost expensive and not viable.
In poorly supervised markets, when the better regulated firms do not step in, the less scrupulous take centre stage. Financial inclusion as a movement is ripe for the plucking. The movement is about providing appropriate, ‘smart’ financial services to safeguard the funds and livelihoods of the poor, to keep money-lenders and loan sharks at bay.
One Indian pre-paid card provider I approached during research for a training course on financial inclusion had no idea what AML meant; but he was keen to learn and asked for guidance on where to find information on the subject. He is a businessman who sees an opportunity to make money, albeit from the backs of the low salaried. Modi’s scheme is not without its detractors. New money payment providers and services look beyond and operate outside of banking, and are championed by non-banking institutions. New players include on-line platform providers, (think Paypal andTransferwise), mobile money (M-Pesa in Kenya, Afghanistan, India and South Africa) and digital or crypto-currency (Bitcoin,Mazacoin, Auroracoin) can be attuned to focus on financial inclusion.
Nonetheless, ‘Big Banking’ has a part to play here. Larger financial institutions have a social responsibility to step up and create, or at least endorse, products offering fair and transparent financially inclusive solutions. They might not make a mint from it, but their social kudos will reap the benefits.